Seminar on Role of Private Sector in Agricultural Marketing
September 3, 2001 New Delhi

Address by Mr P M Sinha, Chairman, Pepsico India Holdings Private Ltd.

Ladies & Gentlemen,

If the private sector is to assist in crafting a collective vision for agriculture over the next 5 to twenty years, the importance of achieving partnerships, between Govt, Agriculture Universities & the private sector, needs to be recognised & focused upon. Globalisation, the impact of new technologies & increasingly vocal consumers are all impacting the development of agriculture, not only in India, but all over the world. Government at all levels, must recognise these trends & set policies that are responsive to them.

These policies should encourage interaction between various sectors to work together to find solutions. Cross linkages between fields of science, health, business, agriculture & engineering need to be stimulated to develop new processes & systems. A prevailing business climate that encourages & rewards strategic investment in knowledge & innovation needs to be created as this will positively impact the growth & development of agriculture. In doing so, such policies will provide direction & momentum in creating jobs & access to new markets.

Today agriculture is a highly competitive industry. With greater efficiencies of scale, smaller margins & a fiercely competitive market, adaptation to change is paramount to survival. The most cost effective model, will clearly emerge as the winning model post 2004 after removal or reduction of agriculture subsidies in the Western world.

The Policy Environment

If the lasting legacy of the green revolution was self sufficiency in primary food grains, this benefit has subsequently been frittered away in terms of a lack of market focus. This is unfortunate. The protracted dependency of our farmers on an institutionalised system of procurement, the continuation of the minimum support price program & subordination of industry priorities to political vested interests have put us in a situation of disadvantage. Today we have an unmanageable surplus of food grains, but regrettably, no integrated approach to agriculture, procurement & food processing, to take advantage of such bounty or capabilities.

More worrying is the fact that public investment in Agriculture has been declining in real terms through the 1980s & most of the 1990s. Enhancement of public investment in agriculture is a catalyst for private sector investment, but cash strapped state Govts. look to the centre for financial support & policy directives. Public investment must go on a priority basis to non green revolution products & dryland areas. The private sector has watched passively from the sidelines.

Well known solutions to the problems of Indian agriculture require political will & a commitment to increase productivity beyond subsistence.

Contact Farming in Indian Agriculture - Way to Salvation ?

Productivity increases come at a price - the cost of carrying large food stocks, the PDS subsidies, disquiet over food safety, lowering of water tables, damage to the environment etc. Clearly, over the longer term, these are not sustainable costs.

One solution that has worked, is the promotion of the concept of contract farming in India. Contract farming can indeed be a vehicle for the modernisation of agriculture in India. It can be a means to bring about a market focus to Indian farming. In my own company, we have achieved a measure of success in Punjab & Karnataka with contract farming & our experience needs urgent extension.

An India specific approach to contract farming needs to be formulated. Even within the country, region specific models will need development, based on a number of factors, related to terrain, soil, climate, nature of crop cultivated etc.

The Challenge of Implementation

The mention of contract farming in an Indian context inevitably leads to a discussion of the few success stories. These may include potato, tomato groundnut & chilli in Punjab, safflower in MP, oil palm in AP & scattered seed production contracts for hybrid seed companies. This is an incorrect position.

In actual fact, success stories are plentiful, though regrettably not often discussed in detail, since they fail to fit into the classic contract farming mould. Examples of such success stories would be Amul & NDDB for milk procurement, the Sugarcane cooperatives in Maharashtra, green leaf satellite out growers to the South Indian tea manufacturing industry, the prawn aqua culture farmers of AP & the rapid spread of poultry projects in West Bengal, Tamilnadu, Maharashtra, Andhra Pradesh & Punjab.

However, in order to popularise contract farming, at a mass level, deep-seated change in mindset & policy is essential.

Why Contract Farming?

At a very fundamental level, contract farming is essentially a means of allocating the distribution of risk, between processor & grower. The latter assumes risks associated with production while the former assumes the risks of marketing the final produce. As has been observed however in practical terms, there exists, considerable interdependence between the two parties. The development of contract farming will succeed if both parties share the risk & rewards.

The broad objectives of promoting contract farming would be:

• To reduce the load on the central & state level procurement system.
• To increase private sector investment in agriculture.
• To bring about a market focus in terms of crop selection by Indian farmers.
• To generate a steady source of income at the individual farmer level.
• To promote processing & value addition, thereby generating gainful rural employment.
• To reduce migration from rural to urban areas.

Managed correctly, contract farming can facilitate a response and adjustment mechanism to changing economic forces.

Prerequisites of contract farming

Identifying the nature of the crop, its marketability and then evolving the technology to be used for production and processing are critical determinants of contract farming. In general, crops easily incorporated in the contract farming are those that have high revenue per hectare and where the technological model gives significant improvements in yields.

Recognising that Indian agriculture holds the key to its own development, it will be required to create our own region & crop specific contract farming models.

What is being suggested?

Govt. can assist through a variety of programs that focus on mentoring, entrepreneurship, building value added cooperatives, developing value chains & diversifying business.
Some suggestions are -:

Government's Fiscal Support;

• Collect no taxes on profits, corporate or otherwise from food processors, who can demonstrate to the satisfaction of a regulator, direct procurement via contract farming of agri-produce from at least 100 registered farmers. This could be time sensitive scheme say for ten years from inception. This program can be made contingent upon the contractor / processor, investing in R & D activities. This will also ensure that while the farmer will be the indirect beneficiary in terms of improved price realisation, the scheme itself will be WTO Green & Blue Box Provisions compatible.
• No taxes or duties to be imposed on import of agri equipment, that will be used in a registered contract farming program. The benefits of increased productivity at lower cost will flow to the farmers.
• Abolish all fees, cess, taxes, duties levies etc on procurement of agricultural or horticultural produce procured through any registered contract-farming program. This would promote direct procurement, improve quality of produce & lead to reduction in the load on the state & central procurement systems.

Government's Policies and Regulations :

• Make it a cognisable offence for any individual or entity, to willfully & knowingly, purchase produce from a contract farmer, without the written consent of the contractor.
• Set up for registered contract farming programs, a quasi-judicial system of contract enforcement. This enforcement could be regulated by the local Mandi boards. They could embrace a streamlined form of arbitration, such as the "Pendulum Arbitration "process in the UK where the mediator is obliged to come down on one side or the other, rather than impose a compromise. Such a rule forces both parties to the centre ground to win the arbitrators favour.
• Single tier regulation for all contract farming & food processing programs. Make compliances with all state & central laws, rules & regulations, demonstrable by the contractor / processor at the local administration level.
• Elimination of red tape with regard to import of established varieties / hybrids for cultivation via a registered contract farming program. Sanitary & Phytosanitary clearances to be fast tracked. Special state level cells to be set up for this purpose.
• Private Sector be permitted to take out a crop insurance policy, on behalf of his contract growers, that will cover both risks & loss of profit. Present policy issuers have limitations.
• There is need to waive requirement that insurance is only provided for notified crops in notified areas or that input costs & Govt. announced MSP are the factors in determining claims.
• Make it mandatory, for students seeking Ph.D. degree in agri related subjects to apply for a twelve week practical application of skills course to registered contract farming programs. The benefits to both parties are quite self-evident.
  

Ladies and Gentlemen, I do not for a minute believe that the list of suggestions, I have made, is complete, or indeed even exhaustive. There is significantly more that can be done, but these initiatives would be a start. I believe that destiny for Indian agriculture, is not a matter of chance. It is a matter of choice. It is not a thing to be waited for, but something to be achieved. One of the greatest discoveries we could make, one of our great surprises, would be to find that we can-accomplish what we were afraid we never could.

Thank you